Budgeting trick obscures N.C.’s true debt

From Sheila Weinberg, founder and CEO of Truth in Accounting (TIA), a Chicago-based think tank that analyzes government financial data.

Last week, Gov. Pat McCory said his proposed budget is a result of making “tough choices.” However, he decided to skip one tough choice that affects every taxpayer: putting a stop to inaccurate financial reporting.

Truth in Accounting (TIA), a Chicago-based think tank that analyzes government financial data, released an in-depth report on the current financial condition of North Carolina. The report reveals that the state did not report $27 billion of retirement debt on its balance sheet.

The unreported retirement debt, which makes up 56 percent of the state’s debt, is a result of inaccurate financial reporting.

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TIA’s report also revealed that only $24 billion of North Carolina’s assets are available to pay its bills, which total $48 billion when factoring in all pensions and health care benefits.

If this debt is not addressed soon, future North Carolina taxpayers will most likely have to pay the debt. When dividing North Carolina’s current bills amongst taxpayers in the state, each taxpayer’s share of the debt would be approximately $8,400.

The main reason North Carolina does not report this debt is because the state uses outdated budgeting and accounting rules called cash accounting. Unfortunately, this means elected officials can claim balanced budgets, while accumulating additional future debt for taxpayers.

Cash accounting allows state governments to use short-term cash-basis numbers when making long-term commitments (such as pension and retirement health benefits owed to employees). This is an outdated method that does not achieve accounting’s basic mission of matching revenues and costs, and obscures the state’s true financial condition.

Instead, annual budgets should be formulated using accrual accounting principles, which would force governments to budget for retirement benefits today that will be due later in the future.

Corporations are required to pay into retirement funds today and not postpone payments until the future. Why are the standards different for the government?

On a more positive note, in 2014 North Carolina made several changes in the right direction, such as increasing employer contribution rates to the state’s largest pension fund – the teacher and state employee retirement system.

This year, the state is also looking to purchase a new statewide financial system, since its current accounting system was created in the mid 1970s. Its current system lacks common functionality such as budget management, but new technology cannot fix flawed accounting practices.

Although the Governmental Accounting Standards Board (GASB) will require state and local governments to account for pension benefit liabilities in their 2015 fiscal year financial statements, TIA strongly recommends North Carolina state officials to implement these practices as soon as possible.

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